20.05.202009:28 Forex Analysis & Reviews: Euro in trend: where will the wave of optimism take it?

Long-term review

Exchange Rates 20.05.2020 analysis

The European currency is experiencing its finest hour: it finally received the support of European leaders and began to increase. However, experts fear that this rise will be temporary, and the "European" currency will be disappointing again.

The wave of optimism that raised the euro was caused by the coordinated actions of the leading EU leaders - German Chancellor Angela Merkel and French President Emmanuel Macron. Both states decided to act on a united front and take responsibility for the fate of their fellow Eurobloc, who have weakened economically against the backdrop of the COVID-19 pandemic. It can be recalled that at the beginning of this week, European leaders presented a plan for economic rehabilitation of the eurozone in the amount of € 500 billion, which also includes a joint issue of debt securities.

The leaders of France and Germany came to the conclusion that it was necessary to create a reserve fund of € 500 billion. Its task is to provide grants to the countries of the eurozone, which are most affected by COVID-19. The resources of the new fund are planned to be formed by issuing bonds, the repayment of which will be made from the budget of the European Union. According to experts, these bonds will become analogues of "coronabond". The lion's share of the costs will fall on the shoulders of Germany, but the eurozone's economic driver is ready for this. According to A. Merkel, the Eurobloc needs to act together, otherwise it has no chance of recovery.

The current situation has given a new impulse to the single currency. It quickly rose by more than 1% in relation to the dollar. There has been a clear bias in favor of the "European" in the EUR/USD pair. As a result, the bulls on the euro took the baton from the bears and went into battle. Earlier, the "bulls" were hindered by the inability of European countries to come to an agreement on fiscal incentives, the untimely decision of the German Constitutional Court regarding the ECB, limiting its financial capabilities, as well as the overwhelming demand for the US dollar as a safe haven currency. Currently, the path to the next peaks has opened before the euro. On Wednesday morning, May 20, the EUR/USD pair was trading near the range of 1.0944 - 1.0945, leaving the low range. For the euro, this is a considerable achievement, since the EUR/USD pair did not go beyond 1.0890 over the past two weeks, and now this price barrier has been successfully broken.

The optimistic picture in relation to the European currency was slightly weakened by experts who fear a rapid decline in the euro after the current movement. Experts believe that the next change in the mood in the eurozone could hit the European currency, whose situation remains precarious. There are reasons for such concern: the previous decline in the euro was caused precisely by Germany's reluctance to financially participate in the problems of European countries affected by the pandemic. However, a month later, Berlin suddenly changed its mind. Analysts do not exclude additions and amendments to this plan by European leaders.

Thanks to the positive decision of the leaders of Germany and France, with the support of the ECB, the euro has opened a new strength. The single currency received additional help from the US stock indexes, which rose in the wake of positive reports about the development of a vaccine from COVID-19, and encouraging signals from the Federal Reserve. It can be recalled that Jerome Powell, the head of the Fed, announced his readiness to keep the rate at a level close to zero until the regulator is convinced of the steady growth of the US economy. According to analysts, the European currency will maintain a positive attitude in the near future, and the dollar will have to make efforts to stay afloat.

Larisa Kolesnikova,
Especialista em análise na InstaForex
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